B.C. Government must cut spending, taxes

Difficult economic times require difficult decisions. Unfortunately, Premier Gordon Campbell and Finance Minister Colin Hansen have indicated they are unwilling to make the tough ones required in the upcoming B.C. budget. Instead, they are using current economic woes as an excuse to avoid what is needed to improve B.C.’s competitiveness. Worse still, cuts to healthcare and education are being offered as the only other alternative and are being used as a scare tactic to garner political support for temporary deficits.

If Premier Campbell, Finance Minister Hansen and the B.C. government are truly interested in doing what is best for the economy (and British Columbians), they would seize this opportunity to reduce government spending and enact permanent tax relief.

First, we must dispel the notion that balanced budgets are the end all and be all. How the government chooses to finance its spending (whether through taxes or deficits) has little impact on real economic activity. What really matters is the size of government -- government spending relative to the size of the economy.

Since budget deficits are simply future taxes, deficits do not change people’s total tax liability (assuming the same level of government spending) and therefore, consumption and investment choices are not influenced.

Only changes in government spending impact total tax liabilities thereby influencing consumption and investment decisions and ultimately, economic activity.

There is a wide body of academic research supporting the idea that the size of government matters with respect to economic performance. According to this research, the size of government in British Columbia is significantly larger than that which maximizes economic growth and social progress. Simply put, B.C. still has too much government intervention in the economy resulting in slowing economic growth and prosperity.

Rather than avoiding the difficult decisions required, the provincial government should follow the lead of B.C. families and trim spending.

And what about Premier Campbell and Minister Hansen’s rhetoric on health care?

Despite spending nearly $15 billion in 2008/09, British Columbia does not have a high quality health care system. In 2008, wait times for medically necessary care from GP referral to treatment still stood at 17 weeks, a length of delay that ranks among the worst in the developed world. In addition, British Columbian’s access to doctors and medical technology significantly lags that in other developed nations.

While health spending does account for the largest portion of program spending (42 per cent), money can be saved without negatively impacting the quality of health care.

A good starting point would be to change the way in which hospitals are funded. Currently hospitals are principally funded by “global” budgets where facilities receive a sum of money each year to care for patients. Funding hospitals on the basis of services delivered would increase the efficiency with which hospital services are delivered in B.C. In addition, allowing private hospitals to compete for the delivery of publicly funded services under such a regime would further increase efficiency.

Similarly, education and other government services could be vastly improved through program reform, while spending less.

Meaningful spending reductions and program reform would provide the resources to implement tax relief aimed at improving the incentives for working and investing.

Specifically, B.C. would be wise to consider:

• eliminating the top personal income tax rate of 14.7 per cent (a cost of $327 million in 2009/10), thus dramatically improving the incentives for effort, risk-taking and entrepreneurship, and aiding in attracting and retaining professional and skilled workers.
• reducing the corporate income tax rate to eight per cent from 11 per cent ($236 million in 2009/10), giving B.C. the country’s lowest corporate income tax rate thus promoting and encouraging investment and development in the province.
• increasing the threshold for income eligible for the small business tax rate from $400,000 to $1 million ($77 million in 2009/10) creating an enormous advantage for small businesses in British Columbia by mitigating the impact of the higher corporate income tax rate they face as they grow.
• harmonizing the provincial sales tax with the GST (revenue-neutral) to exclude business inputs from taxation (currently the case with the PST) and reduce compliance costs on businesses by reducing the paperwork and related efforts to one system instead of two.

All told, these initiatives amount to $640 million in 2009/10. In addition to spending reductions, the B.C. government should eliminate tax rebates and credits that favour certain types of business investments over others (amounting to approximately $360 million per year) to help offset the revenue losses.

The provincial government has a unique opportunity to ensure a brighter future for all British Columbians. However to seize the opportunity it must make the tough choices needed. Spending reductions and tax relief would be a true stimulus to wealth creation now and in the future.